Microsoft deferred sales, bookings raise eyebrows

Analysts have concerns with sales recognized over several quarters

Analysts say two figures from Microsoft’s quarterly report show why the software giant can’t rest on its laurels.

SAN FRANCISCO (MarketWatch) — Following a controversial three months that included a major restructuring, the announcement that its chief executive would retire and plans for one of the biggest acquisitions in its history, Microsoft Corp. on Friday was able to at least bask in the good tidings that came from a strong quarterly earnings report.

For its fiscal first quarter, Microsoft reported a profit of $5.24 billion, or 62 cents a share, on revenue of $18.53 billion. During the year-ago period, Microsoft earned $4.7 billion, or 53 cents a share, on $16 billion in sales. Analysts surveyed by FactSet had forecast Microsoft to earn 54 cents a share on $17.8 billion in revenue. See story about Microsoft earnings.

“While still not a great quarter,” said Rick Sherlund, of Nomura Equity Research, “It was a surprise to the Street and any upside is good news when the set up is so cautious.” Sherlund has a buy rating on Microsoft’s stock and raised his price target on the shares to $40 from $38.

But even though Microsoft
MSFT, -0.38%
delivered results that exceeded Wall Street forecasts, and investors responded positively by sending the company’s stock price up by 6% on Friday, there were two matters of concern that several analysts brought up as suggesting the tech giant can’t rest on its laurels: its numbers for deferred revenue and order bookings.

Deferred revenue refers to business that Microsoft, or any company, has already booked, but recognizes over multiple business quarters. During Microsoft’s first quarter, the company reported deferred revenue of $20.2 billion.

Bookings, also known as billings, are calculated by taking the sequential difference in a company’s deferred revenue, and then adding or subtracting that amount from a company’s quarterly revenue. In Microsoft’s case, its first-quarter deferred revenue was $2.2 billion less than the $22.4 billion it recorded in its fiscal fourth quarter. That amount, since it declined, is then subtracted from the $18.53 billion in Microsoft’s revenue, to give the company $16.3 billion in bookings for its first quarter.

“Microsoft…had a big revenue beat, but they also had a larger than expected drawdown in deferred revenue by almost exactly the same amount as the revenue beat. [And] bookings were essentially in line relative to expectations. These are both red flags.”
Israel Hernandez, MKM Partners.

But those bookings were considered by many analysts that cover Microsoft as just being, at best, in line with expectations, while the company’s deferred sales fell about $700 million short of the consensus estimates. The problem with this is that some analysts suggest it means weaker total sales could be on the horizon for Microsoft.

J.P. Morgan analyst John DiFucci said Microsoft’s bookings came in about $65 million shy of his own estimates for the quarter. DiFucci said that because of this, Microsoft’s better-than-expected revenue suggests more of its business customers chose to forego programs that would let them spread software service payments over multiple years, and which would also let Microsoft recognize more revenue at the start of a contract.

“The revenue upside came at the cost of deferred revenue, which missed expectations.,” said Brendan Barnicle, of Pacific Crest Securities. “[Microsoft] management explained that the change in some of its offerings is changing its revenue-recognition policies.” Barnicle has a sector perform, or neutral rating on Microsoft’s stock.

“In Microsoft’s case, this quarter they had a big revenue beat, but they also had a larger than expected drawdown in deferred revenue by almost exactly the same amount as the revenue beat,” said Israel Hernandez, of MKM Partners. “[And] bookings were essentially in line relative to expectations. These are both red flags.”

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